Professional Responsibilities

Question 1

REG

What is the purpose of a Consulting Engagement?

Answer 1

This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.

Question 2

REG

What is required by the Statements on Standards for Consulting Services (SSCS)?

Answer 2

Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity

NOT REQUIRED: Independence

Question 3

REG

What is the difference between Express versus Implied duties of an accountant under contract?

Answer 3

Express: Contract specifies what accountant will do

Implied: Accountant performs without negligence

Question 4

REG

Accountant’s liability for negligence - What are the requirements?

Answer 4

DUTY - DAMAGES - RESULT

Duty - Accountant must have had duty to perform with due care exercised by an average accountant.

Damages - The client experienced actual damages.

Result/Causation - The damages were as a result of the negligence.

Question 5

REG

What is an Accountant’s Liability for Detecting Fraud
(Under Normal Circumstances)?

Answer 5

It is not the accountant’s job to find fraud and they are not normally liable for not detecting it

Question 6

REG

When can a client be sued for failing to detect fraud?

Answer 6

When a normal audit following GAAS would have detected the fraud.

When an accountant agrees to take on more responsibility than what is required under a normal audit.

When accountant words the audit report to indicate this greater responsibility.

Question 7

REG

When has an accountant committed fraud?

Answer 7

Misrepresentation - Accountant misrepresents MATERIAL fact(s)

Scienter - Accountant commits scienter

Damages - Client has actual damages.

Reasonable Reliance - Client reasonably relied on the misinformation.

Question 8

REG

What is Scienter?

Answer 8

To report something knowing it is false.

Characterized by reckless disregard for truth

Intentionally conceal facts

Question 9

REG

What is the Accountant’s Liability to Third Parties - Privity Defense?

Answer 9

Lack of privity defends against contract breach and negligence.

NOT a defense against fraud.

Question 10

REG

The definition of Ultramares Decision:

Answer 10

Accountants are not liable to third parties unless the third party was an
intended beneficiary of the engagement AND the accountant knew they
would be relying on the financial statements.

Question 11

REG

What is Common Law Fraud?

Answer 11

Regular fraud

Misrepresentation of Material Fact
Scienter
Damages
Reasonable Reliance

Question 12

REG

What is Constructive Fraud?

Answer 12

Gross Negligence - reckless disregard for truth

CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.

Question 13

REG

What are the required actions with Discovery of Illegal Activity?

Answer 13

Accountant must report discovered illegal activity to Audit Committee or Board of Directors

If material in public company; BOD has 1 DAY to notify SEC.

Question 14

REG

What is the Accountant-Client Privilege?

Answer 14

NO Federal Accountant-Client privilege for non-disclosure of private
conversations to a court unless a particular state recognizes such a privilege.

If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.

Question 15

REG

Accountant’s Workpapers - Confidentiality Requirements

Answer 15

1. Can be subpoenaed
2. Can be looked at by another CPA doing peer review
3. Property of the accountant who created them

Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.

Question 16

REG

True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.

Answer 16

Accountants have no way of auditing individual’s personal finances and are not required to do so when preparing a return

Question 17

REG

When a past error is found in a client’s tax return; what should an accountant do?

Answer 17

If a past error is found; accountant should inform client of this error.

Contacting the IRS is NOT required.

If client won’t fix it; then the accountant should reconsider whether they want to do business with the client

Question 18

REG

Name the key responsibilities of an accountant when preparing a tax return.

Answer 18

Accountant must prepare the return in good faith and ask for more information if something is missing

When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court